Increase in mortgage rates |
Higher mortgage rates mean lower property prices.
That is what conventional wisdom will tell you.
It will tell you in the FT, in the office and at dinner parties.
And because everyone is telling you this, you will assume that it is true because everyone “knows” it is true. Except, that it is complete nonsense. I’ll prove this to you a little later. But first:
Are UK mortgage interest rates going up or down?
There is no doubt that the Bank of England’s base rate has increased sharply in recent months. On 14th December 2021 the base rate was 0.1% which was an historic low. But this year, the rate has steadily been climbing due to inflationary pressures caused by a number of factors including global supply chain issues caused by the pandemic as well as soaring energy costs due to the war in Ukraine.
As of August, the base rate is now 1.75%. So, a big move in a short space of time although it should be noted that interest rates are still, historically, at extremely low levels. Nevertheless, this has impacted mortgage rates. At the start of the year, it was possible to find 2 year fixed rate mortgages at under 1%, whereas by August the cheapest 2 year fixed rate on the open market was 2.89%.
This has lead to a raft of articles in the press proclaiming that prices are going to fall because a jump of nearly 300% in mortgage rates is seen as catastrophic for homeowners and buyers who have all seen the cost of borrowing increase significantly.
Increase in mortgage rates – do higher interest rates mean lower property prices?
Below is data from the Bank of England and shows the changes in the base rate from 2003 until July 2007
10 Jul 03 3.50
06 Nov 03 3.75
05 Feb 04 4.00
06 May 04 4.25
10 Jun 04 4.50
05 Aug 04 4.75
04 Aug 05 4.50
03 Aug 06 4.75
09 Nov 06 5.00
11 Jan 07 5.25
10 May 07 5.50
05 Jul 07 5.75
The interest rate increased 2.25%. So, if conventional wisdom is right then prices should have dropped quite considerably.
What happened?
Well, using Land Registry data, in July 2003 the average house price in the UK was £130,805 but by July 2007 the average house price was £188,691 or an increase of 44%!
And in Kensington and Chelsea, the average house price in July 2003 was £455,925 but by July 2007 it had increased to £746,127. The average price peaked at £832,753 in February 2008 which is an increase of 82.6% in under 5 years despite interest rates increasing during this period.
What is also very revealing is that interest rates started falling from December 2007 which according to conventional theory on interest rates should have meant that property prices should have started increasing rather than falling!
This data is not hard to find, so how come conventional wisdom continues to ignore the facts? And this is just the tip of the iceberg. There is so much information that you can use to your advantage.
For example, I said in 2016 that Brexit would be a red herring in terms of property prices over the medium to long term and I also predicted that the pandemic would have little detrimental effect on property prices. This is not because I am a genius. It is simply because I have studied the property market and understand what really drives prices.
And as I have hopefully demonstrated, people’s uninformed belief that interest rates are the decisive factor in what affects property prices is wrong. The same is true for one of conventional wisdom’s other great lies: that the house price to earnings’ ratio is a good indicator of what will happen to prices.
The ratio is simply the cost of a house divided by the average wage. When this gets above 6 times earnings, the belief is that the market must crash because prices become unaffordable. You will see this statistic trotted out in the press the whole time. But is it true?
Well, this is from the Daily Telegraph in 2002:
“The top of the property market has been in trouble for some time… Property in some outer London boroughs now changes hands at phenomenal multiples of average local earnings – the prices being pushed up by a relatively small number of people driven out of expensive parts of the city.
In Bromley, for example, house prices are now 10.4 times local earnings”
So, did prices fall in that time? No, they nearly doubled!, So does this seem like a good indicator to you? No.
Unfortunately, if you rely on conventional wisdom you are doomed to make the same mistakes as the masses. Does that sound like a good plan?
Of course, the easy argument against what I have shown you is simply to say, “it’s different this time”. But that is what people were saying in 2003 when they were comparing it to the boom years of the late 1980’s. Prices couldn’t go up like they had in the 1980’s, they said, because interest rates were increasing and the world was still grappling with the Dotcom crash, 9/11, the War in Iraq, etc., etc.
All of this was different to the 1980’s just as Brexit, the Pandemic and war in Ukraine are very different to the early 2000’s. But what if there are other factors that are more important to the property market that conventional wisdom has been ignoring???
“It’s different this time”.
As legendary investor Sir John Templeton once said: “The four most expensive words in investing are ‘It’s different this time’”.
The forces that are the true drivers of the property market have not changed in centuries let alone just the last couple of decades, so the commentators who cling on to the same old arguments which have been proven to be wrong in the past will be proven to be wrong again.
This is why you will see headlines like this in the BBC from July 2022:
“House prices defy expectations to hit record
House prices hit a fresh record in June, according to Halifax, despite expectations the rising cost of living in the UK would dampen demand.”
They only defy expectations if your expectations are based on completely the wrong information…
Contact Mercury Homesearch
If you would like to discover more about this so that you have an edge over other buyers, sellers and the estate agents, simply email my assistant, [email protected] or call 02034578855 (+442034578855 from outside the UK).
Topic: Increase in mortgage rates
